ELSS (Equity Linked Saving Schemes) is nothing but a type of mutual funds which offers a tax rebate on returns earned during investment horizon, on the other hand, common mutual funds don’t such tax rebate. In this article, let us understand the major differences between ELSS vs mutual funds.
When it comes to mutual funds investment, there are two options whether one can invest in common mutual funds or in Equity linked Savings Schemes (ELSS) mutual funds. Although both ELSS and mutual funds are understood as a separate instrument yet ELSS is a branch of mutual funds, means mutual funds is a broad term whereas ELSS is a narrow term.
ELSS and Mutual Funds:
Mutual funds refer to the investment vehicle which collects money from a large number of investors, makes a pool and invest such collective funds in various financial securities such as stocks, bonds, fixed deposits, debentures etc.
However, Equity-linked saving schemes (ELSS) is those mutual funds in which such collective funds are invested in equity or other equity-related financial instruments of different sectors.
All mutual funds are regulated and managed by professional fund managers who have years of experience in investing. Actually, for each type of mutual funds, separate fund managers are assigned to manage those funds to ensure as high as returns with a low degree of risk.
Read Also, Debt Funds vs Fixed Deposits
ELSS vs Mutual Funds (Comparative Table):
|COMPARISON ASPECTS||ELSS||MUTUAL FUNDS|
|Investment Portfolio||Predominantly in equity or equity related instruments||Diversified in different securities of different sectors.|
|Lock-in Period||3 Years||NO|
ELSS vs Mutual Funds:
The fundamental difference between ELSS and mutual funds are as follows.
1) Investment Portfolio:
The major difference between ELSS and mutual funds is that in case of common mutual funds, investment is diversified in various Government securities and financial securities such as stocks, bonds, debentures etc to minimise the risk, on the other hand, in ELSS investment are made in equity shares of various companies.
2) Lock-in Period:
There is a compulsion of lock-in period of 3 years in ELSS mutual funds, whereas in case of common mutual funds there isn’t such lock-in period. Thus if an investor wishes to invest their money into ELSS mutual funds, he has to park his hard money for the period of at least 3 years.
3) Investment Risk:
When it comes to risk assessment, since in the case of ordinary mutual funds investment are diversified in different securities, hence investment risk is comparatively less as well due to a diversified portfolio. Contrary, in ELSS funds, is invested in stocks only and stocks are riskier as it is influenced by the stock market therefore ELSS mutual funds are riskier as compared to other mutual funds.
4) Returns Potential:
The Returns potential is higher in case of ELSS as compared to other types of mutual funds because funds are invested in equity or instruments related to equity while fund managers of other mutual funds diversify the collective funds into different kinds of securities like both debt and equity.
5) Tax Benefits:
In Equity Linked Saving Scheme is allowed a tax rebate up to Rs 1,50,000/- as per Section 80C of Income Tax Act 1961, however, there is no such tax benefit for other types of mutual funds schemes.
In a nutshell, we can conclude the above topic as ELSS is special types of mutual funds which offer tax benefits and a lock-in period of 3 years is mandatory whereas other mutual funds don’t offer a tax rebate and investors can anytime withdraw their money as well.
The second significant difference between ELSS and mutual funds are risk and returns. The ELSS have completely high risk and hence high returns potential, on the other hand, other mutual funds are less risky and hence returns potential is also less.
References: What are the differences between ELSS and Mutual Funds? Groww.in (source)